Fitch sees telco capex needs delaying deleveraging

FITCH RATINGS said the increased capital expenditure (capex) by PLDT, Inc. and Globe Telecom, Inc. in 2020 will delay their deleveraging despite higher revenue from data and the more stable competition observed in the last quarter of 2019.

In a statement e-mailed to reporters Monday, Fitch Ratings said that it has a negative outlook on the Philippines’ telecommunications sector for this year, reflecting its expectations “that average FFO (funds from operations) adjusted net leverage will rise towards 3.0x in 2020.”

Fitch noted that the capex push by both Globe and PLDT “will delay” their deleveraging despite their strong performance in the last quarter of 2019, driven by “accelerating data monetization and more stable competition.”

It said it expects the Philippine telco firms to “grow by the mid-to-high single digits” this year.

Globe is keeping its capital spending target at P63 billion this year, which includes spillover of commitments from 2019. The amount is 23.5% higher than its spending last year, as it continues to expand and enhance its network.

PLDT, for its part, is allocating P83 billion, up 36.1% from a year earlier. The company aims to serve better the “fast-growing” data usage of its customers.

“The resultant increase will take telecoms capex to above 40% of total revenue, amongst the highest within Fitch’s Asia-Pacific telecoms portfolio. Both PLDT and Globe had revised their debt/EBITDA (earnings before interest, taxes, depreciation and amortization) covenant ratio in their bond trust indentures over the past 12 months, increasing their financial flexibility to raise more debt to fund future capex,” Fitch noted.

It added: “Fitch believes deleveraging would depend on the flexibility to manage their balance-sheet strength. PLDT and Globe had previously cut dividends to payout policies of respective 60% and 60%-75% of the previous year’s core income.”

Fitch said in November that telcos were expected to spend more than they can generate internally over the next 18 months as they turn more to debt to fund capex.

It said it expects “intensified” competition with the entry of China-backed DITO Telecommunity Corp., which hopes to capture nearly a third of the market in two to three years.

“However, the newcomer’s pledge to provide coverage for 37% of the population by July 2020 (with 27Mbps minimum broadband speed) and up to 84% by 2024, suggests limited coverage in the short-term,” it noted. — Arjay L. Balinbin